1. Answer the questions.

1. The current common stock price for Firm D is $100 while the next dividend is $10. Suppose that the dividend is expected to grow at 4% every year. Figure out the cost of equity for Firm D based on Dividend growth model. (30points)

2. The current preferred stock price for Firm D is $80 while the constant dividend is $9.6. Figure out the cost of preferred stock for Firm D. (30points)

3. The current bond price for Firm D is $923 for the 5-year bond with a par value of $1,000 and a coupon rate of 8% paid semi-annually. Figure out the cost of debt for Firm D. (30points)

4. The tax rate is 40%. The value of Firm D is decomposed into 3 parts: equity of 60%, debt of 20%, and preferred stock of 20%. Figure out the weighted average cost of capital of Firm D (WACC). (40points)

5. What is the relationship between WACC and capital budgeting? In other words, does a higher WACC lead to a higher or lower acceptance of a project? (30points)